When the history of the recent Global Financial Crisis is written, the short-term thinking that has infected financial markets is likely to be identified as one of the main culprits.  The current credit crisis underscores how essential it is for banks to consider the long-term economic consequences of their decisions.

As the law firm that spearheaded historic antitrust litigation against Visa and MasterCard’s credit and debit card policies, Constantine Cannon got a first-hand look at how short-term drives for profits can lead to policies that don’t serve long-term interests.  Indeed, the Visa and MasterCard antitrust litigations of the past 12 years provide clear illustrations of banks’ failures to focus on the long-term economic effects of their network policies.

Elementary economics shows that market-wide output, and profits, are maximized when resources are allocated in the most efficient way.  The Visa and MasterCard rules that were the subjects of the antitrust litigations caused markets to perform inefficiently.  For example, but for the exclusionary rules that prevented banks from issuing Discover or American Express cards, banks could have reached new customers by segmenting their portfolios through the unique attributes associated with the Discover or American Express networks, such as their widely recognized brands.  If they had done so, banks would have increased their profitability and delivered more choices to consumers.

Just how weak does a company have to be to rely on a weakened firm defense in a merger analysis?  While the case law is sparse, courts have found such a defense compelling when one of the parties to a merger has been too weak to be a competitive threat.

In United States v. General Dynamics Corp., 415 U.S. 486 (1974), the Supreme Court approved a merger between coal producers who together had a high market share in a concentrated industry, finding that market share and concentration were “not conclusive indicators of anticompetitive effects.”  Id. at 498.  In that case, one party to the merger was unable to compete for new customers because it did not have uncommitted coal reserves.  Id. at 504-506.  In other words, it had a competitive weakness – a structural barrier – that prevented it from becoming a competitive threat.

The Supreme Court stressed that it was important to consider all relevant facts, including a firm’s weakness, in cases in which the market or industry is unpredictable or instable.  Id.  The court found that where a firm lacks resources to engage in new competition, its acquisition would not substantially lessen competition.  Id. at 510-11.